Most people keep their funny money in a taxable brokerage account and their serious money in an IRA.
That’s like keeping your shoes in the kitchen and your utensils in the closet.
To take advantage of the benefits taxable accounts and IRA’s, it should be the other way around.
To define terms:
Funny Money: a do-it-yourself, trading/investing portfolio usually based on market timing and/or picking the “right” investments. (Betting on individual horses.)
Serious Money: a diversified, set-it-and-forget-it, buy and hold portfolio of broad-based index funds. (Owning the racetrack.)
People usually hold serious money in IRA’s because it’s “for retirement” which is serious business.
And they hold funny money in a brokerage account because it’s “not retirement” and just for fun.
But that set up wipes out all the the tax benefits you would get doing it the other way around.
Here’s why:
Your funny money portfolio will be more actively traded, thereby creating capital gains along the way (hopefully).
In a brokerage account, you’ll get taxed on those gains. But not so, in a tax-deferred IRA.
Your serious money is very “tax efficient”, meaning it will generate very low taxes over time. Holding it an IRA eliminates that benefit.
It’s also easy to harvest tax losses with your serious money during temporary downturns (like now). But you can’t harvest losses in an IRA because capital gains and losses are realized in IRA’s.
So if you’re going to keep funny money, then keep it in an IRA and keep your serious money in your brokerage account.
Don’t keep your shoes in the kitchen!
BTW NOW is a great time to make the switch. More on that this week!…
